Resistance is the level above which the stock price is unlikely to rise, where selling pressure is strong enough to prevent further increase. As prices rise, sellers become more active, and at the resistance level, supply exceeds demand, capping the upward trend.

The analogy of a bouncing ball, inspired by Dr. Alex Elder, perfectly illustrates these concepts. Just as a ball bounces off the floor (support) and drops after hitting the ceiling (resistance), prices move between these two levels. When prices fall to a level where demand increases, investors buy, creating a "floor" (support). Conversely, when prices rise to a level where demand decreases, holders sell, creating a "ceiling" (resistance).

Recognizing Support and Resistance

To identify support and resistance levels, analyze a chart to find:

• Support: Low points where the stock price has fallen but didn't go lower, indicating a level where demand prevents further decline.

• Resistance: High points where the stock price rose but didn't go higher, indicating a level where selling pressure prevents further increase.

When a stock bounces off the support level and drops back from the resistance level multiple times, these levels become stronger and more reliable. The more this pattern repeats, the higher the likelihood of it happening again. As traders recognize these historical patterns, they become more confident in forecasting the stock's future behavior.

Round Numbers

Round numbers are a universal support and resistance level, applicable to various securities. Numbers like 10, 20, 25, 50, 65, 500, 1,000, etc., hold psychological significance, representing crucial turning points. These levels often influence traders' buy and sell decisions.

When a stock's price approaches a round number, investors tend to take action:

• Support: As the price drops to a round number (e.g., Rs 50), investors buy, making it difficult for the price to fall further.

• Resistance: As the price rises toward a round number, investors sell, making it challenging for the price to rise above this level.

The increased buying and selling activity at these levels reinforces their importance as support and resistance points, often becoming crucial psychological barriers.

The Importance of Support and Resistance

Analyzing support and resistance levels is a crucial aspect of trend analysis, enabling traders to make informed decisions.

Key benefits:

• Identify trend reversals: Support and resistance levels can indicate the start of a trend reversal, helping traders adjust their strategies accordingly.

• Determine profit-taking: When a stock approaches a strong resistance level that has held multiple times, traders may decide to book profits, recognizing that the price is unlikely to move higher.

• Inform buy/sell decisions: Support and resistance levels provide valuable insights for traders to determine entry and exit points, maximizing potential gains and minimizing losses.

The Psychology Behind Support and Resistance

To understand support and resistance, let's categorize market participants into four groups:

1. Buyers: Traders with a "BUY" position, profiting from price increases.

2. Sellers: Traders with a "SELL" position, profiting from price decreases.

3. Regretful Exiters: Traders who closed positions prematurely, regretting their decision.

4. Undecided Entrants: Traders seeking the right entry point, observing market trends.

At support levels:

• Buyers add more positions, hoping to profit from price increases.

• Sellers (short sellers) exit their positions to limit losses.

• Regretful Exiters re-enter the market, correcting their previous mistake.

• Undecided Entrants buy, seeing the price advance and seeking a good entry point.

The collective action of these groups at support levels drives prices up, as all four groups buy, creating demand. Similarly, at resistance levels, the reverse occurs, with sellers dominating, driving prices down.

Role Reversal

When a support or resistance level is broken, their roles reverse:

• Support becomes Resistance: If the price falls below a support level, it often becomes a resistance level, as sellers may attempt to prevent further price decreases.

• Resistance becomes Support: Conversely if the price rises above a resistance level, it can become a support level, as buyers may try to maintain the price increase.

This role reversal occurs when the supply and demand situation changes, and the price moves beyond a support or resistance level. The broken level then assumes a new role, influencing future price movements.